A Mere Hurdle to Clear

When the SEC ruled in April to re-propose the so-called Merrill Exemption, permitting Series 7 licensees to continue to call themselves financial advisors, thousands of reps and their firms heaved a sigh of relief. Technically, a Series 7 license only gives a rep a right to sell securities, not to provide comprehensive investment advice. But the reality of the modern investment marketing business

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When the SEC ruled in April to re-propose the so-called Merrill Exemption, permitting Series 7 licensees to continue to call themselves “financial advisors,” thousands of reps — and their firms — heaved a sigh of relief. Technically, a Series 7 license only gives a rep a right to sell securities, not to provide comprehensive investment advice. But the reality of the modern investment marketing business is that clients are indeed buying financial advice and the Merrill Exemption is a tacit acknowledgement of that.

But what the SEC ruling did not address is another anachronism that plagues the industry: the Series 7 exam itself. The test, a six-hour monster that tests new recruits on their knowledge about everything from options strategies to MSRB rules, is a prerequisite to any meaningful job in the brokerage industry. But, with its emphasis on the minutiae of securities trading, the exam does less and less to prepare reps to do their jobs at major investment firms. In short, it has evolved into a hazing ritual — a rite of passage, a hurdle to be jumped, the strange details of which are soon forgotten. One veteran brokerage executive puts it this way: “It's like a ticket to get in, a cover charge.”

Norman Nabhan, a managing director at Citigroup's Consulting Group Division holds an even dimmer view: “You have to wonder about a test that you can take, walk out and forget everything on it,” he says. “I took it 30 years ago and even then it seemed to me there was little on it that you needed to build a business.”

It should be noted that Nabhan is now the current president of the Investment Management Consultants Association (IMCA), a 20-year-old organization that issues the Certified Investment Management Analyst (CIMA) designation. Although IMCA did not join the FPA's legal challenge to the Merrill Exception, Nabhan would not be considered a disinterested observer.

Still, he is far from alone among industry executives who see the Series 7 as a throwback to a time when the business was dominated by a macho sales culture, a time before virtually every firm decided they were in the financial advisory business. And that leaves a huge disconnect between the licensing regime and the needs of the clients. “How can you take a six-hour test and hold the financial futures of clients in your hands?” asks an executive from a large brokerage. “In the first few years of my career, my clients were guinea pigs. It's crazy.”

Training Days

There is more than semantics at issue. As the business shifts from a transaction-oriented sale of individual securities (brokering) to “wealth management” (advising), the Series 7 is clearly inadequate. But what troubles the head of one securities firm's continuing education program is the lack clarity on what kind of training and certification the modern financial advisor should have. Now, there is a patchwork of advisory-focused training offered by the financial services industry of varying quality.

According to this executive, there should be an established curriculum — with elements of the Series 7, but also heavy on financial planning basics. The curriculum should be uniform and exhaustive and should be followed by an apprenticeship to ensure that reps are true “financial advisors” and not just advertising themselves as such. “Dental students don't take a test on a Friday and then on a Monday go and work on someone's teeth,” he notes.

Another Side

Not surprisingly, the New York Stock Exchange, which owns the Series 7, disagrees with the criticisms of its test. “Absolutely, the Series 7 is relevant,” says Don van Weezel, NYSE vice president for testing standards and regulatory affairs. “The purpose is for entry-level professionals to prove that they are qualified” in understanding a broad range of securities, regulatory matters and even principles of modern portfolio theory and ethics.

Further, he says, the exam is continually updated to provide material that reflects topics in the news or “areas of concern.” Outdated questions are retired and new ones are added after being vetted by a committee and tested. The NYSE points out that while it's intended to be challenging, the exam is first and foremost a licensing tool, not a training exam.

For this reason, many firms offer compulsory training programs for their new hires that go beyond cramming for the Series 7. Merrill Lynch's training program is five years long, for example. At A.G. Edwards, “You need the base of a Series 7 to understand a lot of what you need to know, but there are gaps there that we try to fill in” with in-house training, says Mike Zuccarello, the firm's vice president and assistant director of training and development. “We need our reps to have a higher level of financial planning skills than just what the Series 7 can give you.” — Will Leitch contributed to this report.

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